Daily analysis 01.09.2016

Another surprise from the British economy. The United Kingdom PMI from industrial sector is growing at the fastest pace this year. The sentiment before the American data continues to support the dollar. The zloty remains under clear pressure against the foreign currencies.

Most important macro data (CET – Central European Time). Estimations are based on Bloomberg information, unless marked otherwise.

• 14.30: New jobless claims from the USA (estimations: 265k).
• 16.00: ISM index for the American industry (estimations: 52.0).

Industrial PMI supports pound

The morning data from the British economy (just as many previous readings) show that the short-term negative impact of Brexit could have been overestimated by economists.

The PMI index for the British industry (prepared by IHS Markit and CIPS) has increased from 48.3 points to 53.3 points, against the estimated 49.0 points. A five-point growth during just one month has leveled the fastest increase of this index in twenty-five years. Moreover, the reading alone is at its highest level this year.

When looking at crucial components of the PMI index, each one of them has significantly improved. IHS Markit and CIPS state that, “the companies experienced a strong inflow of orders form the local, as well as the foreign market. Employment increased for the firs time this year.”

In his commentary regarding the data, Rob Dobson, Markit IHS senior economist, states that, “in July, the companies were informing about withholding their activity. Currently, this activity is returning and the companies, as well as the customers know that the business is coming back to its regular rhythm.”

The pound's weakness that was quoted during past few weeks, has translated to the fastest growth of production prices in five years. Moreover, a pace of this growth was one of the fastest in history. However, if we make attempts of summarizing the situation of PMI indexes, as well as their impact on the British currency, we will need to focus on a few matters.

Primarily, the readings that were published shortly after the referendum have clearly overestimated the short-term Brexit related risks. This fear appeared to be contagious for the Bank of England. The institution suddenly began to ease the monetary policy. Currently, we can claim that this decision was too anxious and it extended the sale of the British currency.

On the other hand, today's publication is causing the index to deflect to the other side. A stop in activity from the middle of this year is currently becoming reborn, which is indicated by the PMI index. However, the publication from services sector on Monday, will be very important for evaluation of the pound as well. If it also shows a rebound above the level of 50 points, the pound would continue its appreciation. The GBP/PLN may clearly exceed the 5.20 level.

The likelihood that the pound will continue its growths and return to the area of 1.50 on the GBP/USD during the coming months, remains relatively small. The main element that lays weigh on the pound, is the trading account deficit, as well the current account deficit at the level of 7% of the GDP. If the most recent wear-off of the pound does not limit the currency too much, pressure on the British currency would increase significantly.

Another element are the discussions regarding keeping the access to the EU market for the British financial sector. It has been generating a surplus within the entire services sector at the level of approximately 2.5% of the GDP. Therefore, if this activity is limited, the general deficit of current account does not have to decrease, even in case of a decrease in the trading account.

As a result, the pound should remain under pressure in the long-term. This is even regardless of internal problems, as well as the matter of Scotland. However, this topic is becoming more apropriate for the year 2017, instead of the fourth quarter of 2016 as we have previously assumed.

Sentiment before payrolls

Twenty-four hours before the data from the American Labor Department, the sentiment remains positive for the dollar. Also, profitability of two-year treasury bonds are relatively high (more than 0.8%). This is also supportive for the view that appreciation of the USD is justified.

However, this situation may change tomorrow. The expected readings (approximately 180k) may appear insufficient for rate hikes this month. Therefore, in order to extend growths on the USD, the result would have to be at the level of at least 220k-230k. Moreover, an increase in salaries would have to be clearly faster than the consensus (at least positive 2.7% y/y). If this is fulfilled, we may actually expect the chances for rate hikes to increase. This should continue to support the dollar. If not, a danger of work-off of the recent appreciation of the USD will significantly increase.

Zloty ignored positive PMI

The PMI index for the Polish industry that was published this morning is quite positive. It increased to the level of 51.5 points, against expectations that were one point higher. The index description made by Markit IHS is positive as well. The survey has taken not that, the pace of creating new workplaces has been fastest since March. Moreover, an increase in production size has been fueled by a rebound of export.

However, the Polish currency did not take advantage of positive data. This may be partially explained with a general deterioration of the sentiment towards emerging market currencies. However, over the past days the zloty has either been under internal or external pressure. Therefore it's not taking chances to work-off its losses. The zloty is most likely to remain under pressure against the main currencies and the forint, until the decision of Moody's on the 9th of September.